Business Law Chapter 26 Homework Grace Cannot Held Liable The Instrument For

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CHAPTER 26

LIABILITY, DEFENSES, AND DISCHARGE

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 26.1—QUESTIONS (PAGE 503)

WHAT IF THE FACTS WERE DIFFERENT?

Suppose that the name Pyramid Title, LLC, had not been included on the face of the check. Would

Peoples be personally liable for payment of the check in that situation? Why or why not? Whether

Peoples would be personally liable would depend on several factors. If he indicated in some way that he

was acting as an agent for Pyramid (by signing Mark Peoples, as agent for Pyramid Title, LLC, for

example), he would not be personally liable on the instrument. If he had signed his name and indicated

that he was acting as an agent, but did not give the name of the principal (by signing Mark Peoples,

THE ECONOMIC DIMENSION

Should Encore Credit Corporation’s failure to “timely fund” the $26,000 loan be taken into consideration

by the court when determining whether Peoples could be held personally liable on the check to the

Jeanmaries? Discuss fully. One can certainly sympathize with Peoples, who had expected to receive the

224 UNIT FIVE: NEGOTIABLE INSTRUMENTS

CASE 26.2—QUESTIONS (PAGE 510)

1A. If the court had affirmed the judgment in favor of T.E.K., against whom might the Keeslings have

had a right of recourse? If an accommodation party pays an instrument, under UCC 3–419(e) he or she

has a right of recourse against the party accommodated. The Keeslings were accommodation parties.

Heritage/M.G. was the party accommodated. Thus, if the Keeslings had been held liable to T.E.K. in this

case and had paid the plaintiff on the note, they could have attempted to collect the amount paid from

Heritage/M.G. If Heritage/M/G/ had paid the instrument, however, it could not have collected this

amount from the Keeslings, because an accommodated party does not have a right of recourse against

the accommodation party.

2A. What might the parties who executed the second note have done at the time to avoid the

outcome in this case? To avoid the result in this case, the parties who executed the second note on

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Signature liability

The applicable provision in this scenario is the fictitious payee rule [UCC 3–404(b) and 3–405].

2A. Rule

In most circumstances, an unauthorized indorsement will not bind the maker or drawer. Under the UCC

provisions known as the fictitious payee rule, however, when a person signs as or on behalf of a maker

or drawer, intending that the payee will have no interest in the instrument, or when an agent or

employee of the maker or drawer has supplied him or her with the name of the payee, also intending

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE 225

the payee to have no such interest, the indorsement, although unauthorized, will bind the maker or

drawer.

3A. Losing party

Under the fictitious payee rule, Golden Years is barred from recovering the amount of the checks from

the bank and thus must bear the loss here. In effect, the fictitious payee rule validates a forged payee’s

4A. Warranties

Any person who transfers an instrument for consideration warrants in part to all subsequent transferees

and holders who take the instrument in good faith that all signatures are authentic and authorized and

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT THE

END OF THE CHAPTER

Because signature stamps create so many opportunities for embezzlement, they should be

banned. It is much harder to engage in embezzlement with checks when some real person has to sign

physically each check. Therefore, if we banned the use of check-signing devices, we would reduce the

amount of embezzlement in all sizes of businesses.

ANSWERS TO QUESTIONS AND CASE PROBLEMS

226 UNIT FIVE: NEGOTIABLE INSTRUMENTS

AT THE END OF THE CHAPTER

26-1A. Material alteration

(Chapter 26—Pages 509–511)

No. Material alteration of a negotiable instrument may be a real defense against payment on the

instrument. As against a holder in due course, the raising of the amount (material alteration) is only a

defense as to the altered amount, and the HDC can recover according to the original tenor of the instru-

ment [UCC 3–407(b)]. In this case, however, Williams materially contributed to the alteration by his

26-2A. Signature liability

(Chapter 26—Pages 499–500, 505–507 & 511)

From all the facts given, Keith qualifies as an HDC. He gave value, took in good faith, and was without

notice of a defense, dishonor of the instrument, or of the instrument being overdue. Only real defenses

claimed by a party are good as against an HDC. One such defense is a party’s discharge in bankruptcy, as

the purpose of bankruptcy is to settle finally all of the debtor’s debts [UCC 3–305(a)(i)(iv)]. Assuming

that Waldo will be discharged in bankruptcy from payment of the note, Keith cannot hold Waldo liable.

Unqualified indorsers are liable on their signatures, providing the holder has made proper presentment,

the instrument has been dishonored, and proper notice of dishonor has been received [UCC 3–415].

Keith made a proper presentment (presented the note to Waldo for payment on the due date); the in–

strument was not paid (it was dishonored); and if Keith gives Adam notice of this dishonor within thirty

26-3A. QUESTION WITH SAMPLE ANSWER: Defenses

Frazier can recover the $1,500 from Kennedy if he is a holder in due course (HDC). He will be an HDC

only if he, as a holder, took the check (a) for value, (b) in good faith, and (c) without notice that the

26-4A. Signature liability

(Chapter 26—Pages 513–514)

Jess cannot hold any of the parties liable on the instrument. Ben is discharged from liability by Jess’s

intentional cancellation of Ben’s signature. This cancellation operates as a discharge even without

consideration [UCC 3–604(a)(i)]. Thus, Jess’s own action of striking out Ben’s indorsement discharged

26-5A. Agents’ signatures

(Chapter 26—Page 501)

The court granted RTI’s motion for summary judgment, holding the Helmers personally liable on Event

Marketing’s check. The court awarded damages, including “bad check” charges. The Helmers appealed

26-6A. Defenses

(Chapter 26—Pages 508–512)

The court granted a directed verdict in Couvion and Shearer’s favor, and Cadle appealed to a state

26-7A. CASE PROBLEM WITH SAMPLE ANSWER: Agents’ signatures

Liability for a dishonored check lies with a disclosed principal, not the principal’s agent, under UCC 3–

402(c). An authorized agent who signs a check imprinted with the principal’s corporate name, on behalf

26-8A. Accommodation parties

(Chapter 26—Pages 500–501)

The court concluded that Frances was an accommodation party and ruled that she was not liable on the

26–9A. Unauthorized indorsements

(Chapter 26—Pages 504–505)

The general rule is that an unauthorized signature will not bind the person whose name is signed. Under

that rule, if an agent lacks the authority to sign the principal’s name or exceeds the authority given by

26-10A. A QUESTION OF ETHICS: Primary and secondary liability

(a) Barnard is liable on the Trustmark notes as their maker. A maker has primary liability. A

primarily liable party is absolutely required to pay an instrument—the liability is not contingent, and a

holder of the note (Trustmark, in this case) does not have to proceed against any collateral (the trucks)

to enforce payment.

230 UNIT FIVE: NEGOTIABLE INSTRUMENTS

the note. As noted in the text, this can occur if a holder agrees not to sue a party against whom the

indorser has a right of recourse.

Barnard asserted this defense against Trustmark’s claim. The court distributed the liability on

both notes between Trustmark and Barnard “on principles of equity,” and Trustmark appealed to a state

intermediate appellate court, which reversed the lower court’s decision and remanded the case “to

calculate the proper amount owed and enter a judgment for interest and attorney’s fees due under the

notes.” The appellate court pointed out that “the maker of a note is not entitled to discharge of his

obligations because of impairment of collateral by the lender. Instead, under [UCC 3–605], only

indorsers and accommodation parties, which Barnard was neither, can obtain a discharge of liability on a